"executives at the giant mortgage lender simply switched regulators in the spring of 2007."

Here's a post in the Washington Post by Binyamin Appelbaum and Ellen Nakashima that a number of people are mentioning. I like it because it validates my Human Agency view that fraud, negligence, and fiduciary misconduct are among the most important causes of this crisis:

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide's new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank's mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

Hello. Didn't we just see this with Shopping Credit Rating Agencies? Also, the conflict of interest between the the companies needing their products rated and paying the businesses that give the rating?

"But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual -- the largest bank in U.S. history to go bust -- and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.

In the parade of regulators that missed signals or made decisions they came to regret on the road to the current financial crisis, the Office of Thrift Supervision stands out."

That must have been quite a parade. I'm sorry I missed it. Is it on YouTube?

"OTS is responsible for regulating thrifts, also known as savings and loans, which focus on mortgage lending. As the banks under OTS supervision expanded high-risk lending, the agency failed to rein in their destructive excesses despite clear evidence of mounting problems, according to banking officials and a review of financial documents."

Now, since I blame the way that the S & L debacle was handled for prpetuating the system of implicit and explicit government guarantees, and since, well, it was a debacle, this is just painful to read.

"Instead, OTS adopted an aggressively deregulatory stance toward the mortgage lenders it regulated. It allowed the reserves the banks held as a buffer against losses to dwindle to a historic low. When the housing market turned downward, the thrifts were left vulnerable. As borrowers defaulted on loans, the companies were unable to replace the money they had expected to collect.

The decline and fall of these thrifts further rattled a shaky economy, making it harder and more expensive for people to get mortgages and disrupting businesses that relied on the banks for loans. Although federal insurance covered the deposits, investors lost money, employees lost jobs and the public lost faith in financial institutions."

And regulations work? How about the Human Agency problem of Regulators? Ever heard of them?

"As Congress and the incoming Obama administration prepare to revamp federal financial oversight, the collapse of the thrift industry offers a lesson in how regulation can fail. It happened over several years, a product of the regulator's overly close identification with its banks, which it referred to as "customers," and of the agency managers' appetite for deregulation, new lending products and expanded homeownership sometimes at the expense of traditional oversight. Tough measures, like tighter lending standards, were not employed until after borrowers began defaulting in large numbers."

This model of businesses paying the people who oversee them is silly. I'm sure someone thinks that they should pay these bills, since they're the ones needing the rating, but the conflict of interest and shopping dilemma is almost impossible to overcome. I've said that it can only be overcome when standards are easy and clear to evaluate, but Cate assures me that my Human Agency model doesn't even allow that. She could be correct. In that case, I would need a totally revamped system, that doesn't even allow this simple exception.

"The agency championed the thrift industry's growth during the housing boom and called programs that extended mortgages to previously unqualified borrowers as "innovations." In 2004, the year that risky loans called option adjustable-rate mortgages took off, then-OTS director James Gilleran lauded the banks for their role in providing home loans. "Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion," he said in a speech.

At the same time, the agency allowed the banks to project minimal losses and, as a result, reduce the share of revenue they were setting aside to cover them. By September 2006, when the housing market began declining, the capital reserves held by OTS-regulated firms had declined to their lowest level in two decades, less than a third of their historical average, according to financial records."

Here we go again. I see no excuse for this. It's either fraud, negligence, or fiduciary mismanagement, and it's possible to comprehend. It's called lowering the standards. Can you say "riskier"?

"Scott M. Polakoff, the agency's senior deputy director, said OTS had closely monitored allowances for loan losses and considered them sufficient, but added that the actual losses exceeded what reasonably could have been expected.

"Are banks going to fail when events occur well beyond the confines of reasonable expectation or modeling? The answer is yes," he said in an interview."

Pardon me? When events go well beyond the confines of reasonable expectation or modeling. What does that mean? The loosening of standards is risky. Is that even beyond the confines, or well inside?

"But critics said the agency had neglected its obligation to police the thrift industry and instead became more of a consultant."

What you had here is a regulatory motif that was too accommodating to private-sector interests," said Jim Leach, a former Republican lawmaker who led what was then the House Banking Committee and now lectures in public affairs at Princeton University. "In this case, the end result is chaos for the industry, their customers and the national interest."

Yep.

"In testimony before Congress in the fall of 2001, Reich listed what he considered the lessons of Superior's failure. Among them, he said, "we must see to it that institutions engaging in risky lending . . . hold sufficient capital to protect against sudden insolvency."

But instead of increasing oversight, OTS shrank dramatically over the next four years.'

They must have been closed hearings.

"Gilleran was an impassioned advocate of deregulation. He cut a quarter of the agency's 1,200 employees between 2001 and 2004, even though the value of loans and other assets of the firms regulated by OTS increased by half over the same period. The result was a mismatch between a short-handed agency and a burgeoning thrift industry.'

First mismatched loans, now mismatched regulations.

"He also reduced consumer protections. The other agencies that regulate banks review corporate health and compliance with consumer laws separately, which consumer advocates say helps ensure that each gets proper scrutiny from specialists. Gilleran merged the consumer exam into the financial exam. '

Sounds like he also handed out the answer sheet.

"John Taylor, chief executive of the National Community Reinvestment Coalition, and other advocates say better enforcement of consumer protections, such as rules against predatory lending, could have kept thrifts healthy because consumer complaints are an early warning of unsustainable business practices. "

Not in a nation of whiners.

"The long delay in issuing the guidance allowed companies to keep making billions of dollars in loans without verifying that borrowers could afford them. One of the largest banks, Countrywide Financial, said in an investor presentation after the guidance was released that most of the borrowers who received loans in the previous two years would not have qualified under the new standards. Countrywide said it would have refused 89 percent of its 2006 borrowers and 83 percent of its 2005 borrowers. That represents $138 billion in mortgage loans the company would not have made if regulators had acted sooner. "

This is where I believe that the implicit government guarantees to intervene in a financial crisis come in. I simply believe that any intelligent person, who knew these loans were risky, who understood that they had been employing lax standards, could justify this terrible risk only by assuming government backing. Otherwise, the fact that regulators didn't stop these loans doesn't mean that the loans made sense, in and of itself. Surely Countrywide had to have a modus to determine the sensibility of loans on its own?

"Even after the guidance was issued, some banks interpreted it as permission to maintain old habits because the regulatory agencies had stopped short of issuing a binding rule. "

So what? Can't you spot a bad loan on your own? That's your business, for heaven's sake. They simply must have understood a government blessing as a government guarantee.

"In addition to taking more risks, Washington Mutual was setting aside a smaller share of revenue to cover future losses. The reserves had steadily declined relative to new loans since 2002. By June 2005, the bank held $45 to cover losses on every $10,000 in outstanding loans, according to financial records filed with federal regulators. Average reserves at OTS-regulated institutions had declined by about a third since June 2002, but Washington Mutual's reserves had fallen even further. They were 25 percent lower than the average for OTS-regulated thrifts.

OTS did not force the company to address the problem with reserves, though agency examiners worked full-time inside Washington Mutual's Seattle headquarters.'

Did regulators have to tell them how to breathe? This is Riskier 101.

"But the agency did not fix a basic problem with how Washington Mutual predicted future losses. According to a confidential internal review in September 2005, the company had not adjusted its prediction of future losses to reflect the larger risks associated with option ARM loans. The review described those loans as "a major and growing risk factor in our portfolio." As a result, the company was not setting aside enough money to cover future losses. '

It's your fault. No, it's your fault. But you didn't tell me. But you should have known. Calling a Restoration Wit.

"But critics in government and industry said Countrywide's shift from OCC oversight to that of OTS was evidence of a "competition in laxity" among regulators eager to attract business. "Institutions should not be able to find a safe haven in one regulator from the reasonable concerns of another regulator," said Karen Shaw Petrou of Federal Financial Analytics, referring to the Countrywide episode. "

And for this obvious bon mot she'll probably be canonized.